Portuguese companies wary of private equity partnerships

Venture Capital has become increasingly more important in Portugal to secure finance and investment for startups and small companies in technology areas for growth. Stephan Morais of Indico Capital Partners, one of Portugal’s most important venture capital companies, explains more.

Text: Chris Graeme

Stephan Morais, addressing a recent capital markets debate (speaking second on the left in the photo) organised by the American Chamber of Commerce in Portugal (AmCham) is not a fan of the term used in Portugal for venture capital which is ‘risk capital’ because it is not a term that conveys stability or confidence for investors. Instead he prefers to divide the investment that companies like his deal in into private equity and venture capital.

In Portugal the percentage of GDP that is invested in these two areas is “very small” with figures from the past two to three years is 81% below the European average of capital invested. In other words the sector itself is “very small”.

This is particularly problematic in a small country like Portugal in which there is a lack of own capital, yet the Catch 22 situation is that companies here need to raise capital to expand.

“We have a capital market in terms of the stock market (Euronext Lisbon) which is fortunate to be integrated at a European level on a very strong platform giving access to Europe-wide capital, but our corporate market is made up by lots of small and medium-size companies, and increasingly by technology companies,” he said outlining the Portuguese reality.

Explaining the difference between private equity, which invests in companies that already have products and services to sell and cashflows, so investment funds do capitalise these companies so they can grow and become more attractive, and internationalise; VCs essentially invest in technology companies linked to softwares, so that they can have the capacity scale up and become “world champions” in specific areas.

“Both of these sectors in Portugal are undercapitalised. It’s not that we don’t want or need this capital, but rather the funds that represent this capital in Portugal are small in terms of international scale, and cannot provide the market here with all the capital it needs,” laments Stephan Morais.

Portugal’s companies lack ambition and understanding of capital markets

In terms of private equity, Portuguese entrepreneurs sometimes are reluctant to open their companies to private equity because it used to be seen (and sometimes still is) as a sign of failure that they can’t get loans in a traditional way, and to seek it from the capital markets would somehow compromise their control over their businesses if they allowed capital partners in. “This is a shame because it shows a certain lack of understanding, knowledge, ambition and sophistication on the part of our entrepreneurs”, he said.

“Portuguese entrepreneurs don’t seem to have the ambition to take a small company and develop it into a medium-size or larger company because our entrepreneurs are worried about losing control, instead of being open to sharing control in order to allow their company to grow on an international scale,” explains Stephan Morais.

Stephan Morais points out that this is a cultural problem which is not positive for the country. However, private equity in Portugal, while still small, has existed for some decades, and there are funds that are able to undertake increasingly larger investment transactions.

Portuguese startup founders – Ronaldos in their field

Venture Capital in Portugal, on the other hand, is a more recent phenomena (10 years or so), although there have been operators linked to the State for some decades (such as the development bank), while Portugal’s banks have also had departments of venture capital for some 20 years.

“The reality is that the VC market as it exists today in Portugal has only been going for 10 years and this happened because a decade ago the first Portuguese technology entrepreneurs emerged, partly thanks to an increase in the quality and sophistication of higher education in Portugal, and also because the globalisation of these graduates all over the world provided a generation of Portuguese high-flyers who were highly qualified in sciences and engineering, and who had and have the ambition to be “the Ronaldos in their field”.

“This is a cultural transformation which I have witnessed in my lifetime having spent many years living in Portugal and overseas over the past 25 years, one which was not that common in my generation,” the Indico Capital Partners founder revealed.

Today, and over the past 10 years, Portugal has a group of entrepreneurs that are not necessarily linked to large companies or systems, politics, neither economics or important families, yet have important companies that operate on a global scale.

In this category you only have to think of large unicorns with Portuguese founders or DNA such as Talkdesk, OutSystems, Farfetch, Feedzai, Remote, Unbabel and Sensei which all started off in Portugal, or had Portuguese founders and today have a valuation of US$1,000,000,000 or more.

“These companies are multinational leaders in their areas and have gown thanks to significant overseas capital, and rival Spain or outstrip other countries,” Stephan Morais points out.

Funds are small and limited

But what do these two areas — private equity and VCs have in common? It’s not because they are small — because it has been proved internationally and nationally (Portugal has an Association of Venture Capital Companies – APCRI which was founded in 1998, of which Stephan Morais sits on the board, although tellingly its website does not seem to be in English!) — and which enjoy a good level of capitalisation in terms of funds; it is that in Portugal these funds are not only small but their capital is limited.

“It is not easy, even when these funds show a good performance, to obtain capital from larger international funds because these funds are small on an international scale, are not on the radar for large international funds, such as pension or university funds for example, while Portuguese financiers are few and far between, and those that do exist are extremely adverse to risk-taking”, explained Stephan Morais.

This, therefore, keeps the VC sector small (they are basically the following: Armilar Venture Partners, Faber, Bynd Venture Capital, Big Start Ventures, WISENEXT, HCapital Partners, Alpac Capital, Best Horizon, and Indico Capital Partners (There are other smaller ones)) and this has been supplemented at times by European capital or State capital (Portugal Ventures and the Portuguese Development Bank – Banco de Fomento are examples).

“Over the past decade European investment has been very important for these industries (technology) which are vital for the European economy and Portugal, and for diversifying and sophisticating the economy, whIle in recent decades there has been an attempt to support and boost these industries, but very often the direction/application of these funds has not always been ideal, involve many conditions attached which can even hamper the economic activity of these companies”.

Stephan Morais says that what has not been done in Portugal is to provide incentives for these venture capital companies unlike those which deal in stocks, shares and equities.

“The Portuguese market needs to be given incentives, and here the State has an important role to play, (this does not mean in terms of tax or regulatory frameworks), but the private sector in Portugal does not have much capital, and the capital that does exist is not fuelled into this area”, says Stephan Morais.

The question remains of what can be done in Portugal so that the private sector can invest more and here the State has a role to play as a facilitator in terms of rules and regulations to allow this to happen, concludes Stephan Morais, the founder and Managing Partner of Indico Capital Partners.